Americans spend $140 billion per year to comply with the tax code – that's a lot of money. And, although that figure may be enough to tempt you to look for ways to cut back on tax prep services, H&R Block reports that consumers who prepare their returns themselves leave $1 billion dollars in unrealized tax savings on the table. Where's the middle ground, then? If you're looking for ways to minimize your tax obligation and keep your precious cash out of the hands of accountants and tax prep professionals, check out these six tips.
1. File Your Return for Free
If you're filing a basic return or you have a firm understanding of your financial picture and its tax consequences, you probably don't need to purchase tax preparation software or take your documents to an accountant. Go to the IRS website, click on FreeFile, and use one of the many resources there that can help you prepare your tax return for free.
If your adjusted gross income is under $58,000 and you meet a few other qualifications – depending on the website you choose – you can use these services. If your AGI is higher than $58,000, you can still file for free, you just won't get any help – there's a link for free electronic forms which you can fill out manually to complete your return.
2. Consider Itemizing
If you've been in the habit of simply taking the standard deduction on your return, you might want to rethink that strategy. Significant unreimbursed medical expenses, a recent home purchase, and charitable donations are all reasons to consider itemizing your deductions. If you're not sure it's the right route for you, complete the interview portion of any online tax prep website for a recommendation.
3. Take the Home Office Deduction
If you're self-employed and work from home or if you do a good bit of business from a home office, take advantage of the home office tax deduction. You may be able to cut your tax bill significantly by doing so. Research the IRS website for qualifications and restrictions, and be sure you understand how to calculate the deduction.
4. Get Free Help
If you've got a question about a deduction or credit or you need help with any other part of your return, call the IRS and get your answers free of charge. Or, schedule an appointment at a local tax prep office and bring your last three tax returns in for a free evaluation. The lessons you learn from past mistakes can help you save on your 2013 return. Plus, your tax preparer might be able to help you get money back from a previous year's return, as well.
5. Open a Traditional IRA
Even though 2013 is in the books, you can still open a traditional IRA and get a tax deduction as long as you qualify. You just need to do so before April 15. See the IRS website for details.
6. Don't File Late
No matter what, don't file your return late. You face penalties and additional interest when you do. Start now by getting all your documents in order, and set aside some uninterrupted time at least one week before the deadline to prepare and submit your return.
To avoid an audit, be sure to fill in all lines and boxes if you're filing manually – the IRS doesn't take kindly to blank spaces. If something doesn't apply to you, enter a zero or a dash. And don't forget to sign your return – sometimes it's the most obvious oversights that can get us in trouble. Be sure you have rock solid documentation for all deductions, and report every cent of your income. Saving money when filing your taxes is important, but so is taking the necessary steps to avoid a knock at the door from the IRS.
What other ways can you think of to save money on your taxes?
My favorite way to save on taxes is by contributing to my HSA, tax free on the front end and tax free on the back end if used for health costs, and at age 65 allows for penalty free, taxable withdrawals.
Another great way to save on taxes is the Retirement Savers tax credit, which can provide a credit of up to 50% of the first $2,000 of retirement savings per individual, (max credit of $2,000 for a married couple)
Thanks John for the great tips!